Great stories, the old saying goes, do as much to make great reporters as great reporters do to make great stories. The financial crisis has proven the adage, producing a bumper-crop of insightful, informative and even (gasp!) entertaining financial books over the past few years to go along with the usual mix of hucksterish investment advice, new economy boosterism, and management-theory pabulum that makes up the core of most business publisher’s lists. New York Times Dealbook editor Andrew Ross Sorkin’s excellent Too Big Too Fail was one of the first, and is now is being turned into an HBO movie. (Paul Giammatti as Ben Bernanke? Sign me up.) Michael Lewis moved back from books about the business side of sports to the fratty side of business with his bestselling The Big Short. Even heavyweight pop-historians (Niall Ferguson’s The Ascent of Money and High Financier) and the Gauloises-smoking skinny-jean set (N+1 magazine’s Diary of a Very Bad Year) have gotten in on the act.
But, with holiday gift giving season upon us, I wanted to revisit one of the most overlooked business books of the year, Wall Street Journal investment technology reporter Scott Patterson’s The Quants. Starting with physicist Ed Thorp—blackjack pioneer, the “Godfather” of the quants and author of Beat the Dealer and Beat the Market—Patterson glides smoothly through a half-century’s worth of intellectual, mathematical and financial innovation through pithy personal and career profiles of the men (for better or worse, the ranks of the quants consist almost exclusively of men) who led the way. Thorp, it turns out, is a fitting Patient Zero, not only because of his success at translating the techniques of physics to financial markets, but also because of the prevailing view among the quants who followed him that Wall Street is little more than a blackjack table—zero-sum, mechanistic, beholden only to the rules of arbitrary, but predictable, oscillation. It’s a view that almost describes financial markets, one that can produce massive returns under most market conditions, but also blinded practitioners to the corrupt number crunching and exuberant irrationality that eventually laid the market low, bringing many a naïve quant with it.
Patterson’s book serves as something of a corrective to the prevailing narrative on Wall Street over the past few decades—that raw cognitive abilities and ever more complex mathematical models will smooth out risk and bring us the Great Moderation. The challenge for a writer of such books is to not come across as too strident or one-sided in arguing against the conventional wisdom, but Patterson is able to largely avoid such critical oversimplification by sticking to the complex personal and intellectual paths of the quants themselves, replacing what could have been dull histrionics with compelling characters and complex insights.
The subject matter can sometimes be esoteric and complex (Brownian Motion, Mandelbrot sets…), but Patterson’s knack for lucid explanation makes for one of the most readable books on technical trading since Roger Lowenstein’s When Genius Failed – which is quite the compliment in financial journalist circles.